High Court Of Delhi
Escorts Electronics Ltd. vs. CIT
Asst. Year 1982-83
D.K. Jain & Ms. Sharda Aggarwal, JJ.
IT Ref. No. 505 of 1992
11th September, 2002
Santosh K. Aggarwal, for the Petitioner : R.D. Jolly, for the Resondent
D.K. JAIN, J. :
At the instance of the assessee, the Income-tax Appellate Tribunal, Delhi Bench âEâ, Delhi (for short, âthe Tribunalâ) has referred the following questions under s. 256(1) of the IT Act, 1961 (for short, âthe Actâ), for our opinion :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that unabsorbed depreciation of an earlier year could not be allowed to be set off against the income taxed under s. 56 (sic) of the IT Act, 1961?
2. Whether, on the facts and in the circumstances of the case the Tribunal was right in upholding the allowance of only 10 per cent of the total expenditure incurred by the assessee as expenditure for earning the income that was the subject-matter of tax ?” The assessee-company, initially incorporated as a public limited company under the name and style of âCGR India Limitedâ, was engaged in the business of manufacturing and assembling x-ray equipments. However, its business activity stopped from 1st Jan., 1981, as the foreign collaborator had withdrawn from the company. The name of the company was thereafter changed to M/s Escorts Electronics Limited. For the asst. yr. 1982-83, for which the previous year ended on 31st Dec., 1981, the assessee filed its return declaring a loss of Rs. 11,76,539. While computing total income for the said assessment year, the AO held that since the business of the assessee had ceased to exist, the entire income was to be assessed under the head âIncome from other sourcesâ and not under the head “Profits and gains of business”. He, accordingly, assessed the receipts on account of sale of drawings and industrial files (Rs. 12,48,000); profit on sale of other assets (Rs. 31,286) and other receipts (Rs. 83,374) under the head âIncome from other sourcesâ. The entire expenditure of Rs. 25,48,083 incurred by the assessee during the previous year was also disallowed and only a sum of Rs. 1,36,266, being 10 per cent of the total aforementioned receipts, was allowed as deduction. The depreciation for the current year and unabsorbed depreciation for earlier years was also disallowed. Thus, the total income for the year was assessed at Rs. 12,26,394. Being aggrieved, the assessee preferred an appeal to the CIT(A), who affirmed the view of the AO that the income for the year was to be assessed under the head âIncome from other sourcesâ. However, relying on the decision of the Bombay High Court in CIT vs. Estate and Finance Ltd. 1977 CTR (Bom) 806 : (1978) 111 ITR 119 (Bom), the CIT(A) allowed set off of the carry forward unabsorbed depreciation of earlier years against the income computed under the head âIncome from other sourcesâ. The assessable income was thus reduced to nil. The assessee as well as the Revenue, being aggrieved of the order of CIT(A) took the matter in further appeals to the Tribunal. The Tribunal dismissed the appeal of the assessee regarding disallowance of the expenses but allowed the appeal filed by the Revenue, holding that the depreciation brought forward from earlier years could not be set off against income from other sources.
On assesseeâs moving an application under s. 256(1) of the Act, the aforenoted questions, as corrected, have been referred. We have heard Mr. Santosh K. Aggarwal, learned counsel for the assessee and Mr. R.D. Jolly, senior standing counsel for the Revenue. Since, in our opinion, the issue, subject-matter of the first question, stands answered by the Supreme Court in CIT vs. Virmani Industries (P) Ltd. (1995) 129 CTR (SC) 189 : (1995) 216 ITR 607 (SC), we deem it unnecessary to dwell on the question in greater detail. In Virmani Industriesâ case (supra) the assessee was engaged in the manufacture of soap and oil during the previous year relevant to the asst. yr. 1956-57. The business was stopped in that year, whereafter the factory was let out on hire. Ten years later i.e., in the previous year relating to the year 1965-66, the assessee started the business of manufacture of steel pipes. For the purpose of this business, a part of the old machinery used in the manufacture of soap and oil was utilised. In the assessment proceedings relating to the asst. yr. 1965-66, the assessee claimed that unabsorbed depreciation, to the extent it pertained to the old machinery utilised in the new business, should be brought forward and set off against the profits of the new business. The claim was rejected by the ITO and by the AAC. The Tribunal, however, upheld the assesseeâs claim. The view of the Tribunal was affirmed by the High Court. Upholding the decision of the High Court, the apex Court held that if after setting off the unabsorbed depreciation allowance relating to the asst. yr. 1956-57 against the income for the following assessment years, any depreciation allowance still remained unabsorbed, it would be set off against the income for the accounting period relevant to the asst. yr. 1965-66. For coming to the said conclusion, the Supreme Court relied on its earlier two decisions in CIT vs. Jaipuria China Clay Mines (P) Ltd. (1966) 59 ITR 555 (SC) and Rajapalayam Mills Ltd. vs. CIT 1978 CTR (SC) 167 : (1978) 115 ITR 777 (SC), wherein it was observed that the unabsorbed depreciation was not only to be set off against other heads of income in the relevant previous year but where it is carried forward, it “stands exactly on the same footing as the current depreciation”. Thus, reiterating the view expressed in the aforenoted decisions, in Vrmani Industriesâ case (supra), the apex Court has held that though on the first impression the expression “profits or gains chargeable” appear to refer only to profits or gains of business or profession chargeable under s. 28 but in view of the said decisions, the said expression is not so confined and it refers to income from all the heads of income specified in s. 14 of the Act, which includes “Income from other sources”.
In view of the said authoritative pronouncement, we are of the opinion that the Tribunal was not right in holding that the unabsorbed depreciation carried forward from earlier years could not be allowed against the income assessed under s. 56 of the Act under the head “Income from other sources”. Consequently, the first question is answered in the negative i.e., in favour of the assessee and against the Revenue. As regards the second question, Mr. Aggarwal, learned counsel for the assessee submits that the assessee, at whose instance, the reference has been made, is not interested in getting an answer from this Court on the question. Accordingly, the second question is returned unanswered. The reference stands disposed of in the above terms with no order as to costs.
[Citation : 258 ITR 23]